Valuations on properties affected by the bushfires will directly affect some SMSFs now.
Pre-fire valuations will be used for the 2019 financials so will still be a determinant for each member’s 2019 total super balance. They will also contribute to closing pension balances which will determine the minimum level of pension that must be drawn for the balance of this financial year. Apart from a possible shortfall of income to fund such pensions, due to a lack of rent from fire affected properties, the effect of the fires on contribution eligibility and pension levels will not become apparent until the beginning of next financial year.
Transactions involving the commencement of a pension, including a death benefit pension, can generally rely on a property valuation that has occurred within the last twelve months. That principle does not hold when the property value has been materially diminished before the effective date of the calculation. Importantly, the property need not be damaged for its value to drop. This may occur due to a general downturn in the area as could be expected following the large-scale destruction of entire communities we have witnessed.
It is to be expected that every SMSF property that has been directly damaged will have been insured but the result of each claim will be unique. Individual issues of adequate sums insured, replacement versus indemnity value and other considerations will need to run its course. Each process will take months and could run into years.
The valuation to be applied to any property in such a situation is highly problematic. In cases where the asset is not required to be liquidated, valuations will be difficult and require substantiation but, ultimately, the property will be rebuilt and valued definitively at that time. The situation is much more difficult where the property is required to be part of a withdrawal such as a lump sum death benefit.
The death benefit period can be extended where there is reasonable cause and I could think of few causes that would be more reasonable than to await the rebuilding of an insured property. The personal considerations of beneficiaries may be pressing so it may be that some benefit payments will be negotiated. Like the fires, I expect that unprecedented circumstances will arise which will require wisdom to negotiate.